ENCOURAGING AND REWARDING WORK

4.1  In previous Budgets, the Government has set out a strategy for high and stable levels of employment, through the promotion of employment opportunities for all - the modern definition of full employment for the 21st century.

4.2  Since the objective of full employment was first set out in 1944 there have been major demographic and social changes, new developments in the labour market and the global economy and a rise in female and part-time employment. Over the last 20 years structural unemployment has increased, alongside the wide swings in the level of employment associated with the boom and bust economic cycle. The labour market participation rates of particular groups of individuals including men aged over 50, lone parents and disabled people have seen a substantial decline. And the number of households where no-one is in work has risen dramatically.

4.3  We have also come to understand more about the way the labour market works, and to look more closely at features of the labour market - in particular the operation of the tax and benefit system - which place barriers in the way of greater employment opportunity. In May 1997, for example, around three quarters of a million families faced a poverty trap where over 70 pence of every extra £1 they earned was lost in tax and benefit clawback.

4.4  The old approach to full employment relied heavily on the levers of macroeconomic management to secure full-time male employment. Active welfare to work policies were not as important when a high proportion of the unemployed could find work relatively quickly. Skills mattered less when there were plentiful job opportunities for people without qualifications. Distortions in the tax and benefit system had a much weaker impact when work took people substantially above the level of benefits. Family-friendly work practices were less relevant when fewer people needed to balance work and family responsibilities. And it was more valid to focus only on the claimant unemployed when those outside the work force altogether were there from personal choice, and not because they lacked employment opportunity. Now that we face a new set of labour market problems, this approach has become an outdated and inadequate response.

4.5  That is why the Government adopted a new approach with three key elements:

• the New Deal programmes to help people from Welfare to Work, focusing help on groups detached from the labour market; the young and long-term unemployed, lone parents, disabled people and partners of the unemployed;
• reforms to make work pay, bringing in an entitlement to a minimum level of take home pay through the national minimum wage and changes to the tax and benefit system, including the Working Families Tax Credit and the Disabled Person's Tax Credit;
• investment in education and skills, to ensure that everyone has access to the skills they need to progress in the workforce, and to align the UK skills base with the needs of the modern economy. The Government has begun a substantial programme of investment in skills across the workforce of today and tomorrow.

4.6  Increasing numbers of people combine caring for their children or elderly, sick or disabled relatives with paid work. That calls for family-friendly employment practices, that help match the needs of employers, employees and their families.

4.7  The Government also aims to address the 'low pay-no pay' cycle, as part of its overarching strategy to tackle poverty. Improving employability is the key to tackling poverty. Most of those with low incomes are poor because no one in their household has paid work. As box 4.1 demonstrates, there is strong evidence that work is the best route out of poverty for those of working age.

4.8  The build up of long-term worklessness associated with previous recessions was immensely damaging for individuals - destroying their connections with the labour market, their skills and employability. It meant that, when the economy moved into the recovery phase, labour market bottlenecks, skill shortages and wage inflation stalled recovery while worklessness remained at unacceptable levels. The long experience of high unemployment in the UK has, therefore, strengthened the Government's view that a stable and prudent framework for fiscal and monetary policy - set out in Chapter 2 - is a vital precondition for an extension of employment opportunities.

4.9  This agenda of structural reform and stability for the long term will help to ensure that the economy is well placed to meet the challenges of the global economic slowdown. The prospect of slower economic growth comes against a background of growing employment and falling unemployment. The Labour Force Survey shows that since the last election employment has risen by over 400,000, whilst unemployment has fallen by almost 300,000 on the ILO definition, and by over 350,000 on the claimant definition.

4.10  These figures are the product of substantial labour market flows into and out of employment. Every quarter, around 2 million people move into a new job of whom around 40 per cent were previously out of work (see chart 4.1). This means that, despite the fact that overall economic activity is projected to grow more slowly next year, millions of new job opportunities will continue to emerge. A slowdown of growth in the year ahead is consistent with an economy that generates a large number of employment opportunities. The Government's employment strategy will mean that individuals are better placed to take advantage of those opportunities.

Chart 4.1

4.11  Alongside the development of this strategy in the UK, employment has been central to the Government's international and European agenda. The Government has played a leading role in promoting agreement on the first ever set of European Union Employment Guidelines in November 1997, and agreed with other Member States to produce National Employment Action plans each year. Under the UK Presidency of the EU it was agreed that:

• these action plans should identify best practice between Member States;
• measures were needed to reinforce the development of a skilled and adaptable workforce, including through lifelong learning;
• existing regulatory frameworks should be reviewed at all levels; and
• tax and benefit systems should be reviewed to make it easier for employers to create new jobs and more attractive for employees to fill them.

4.12  The UK has also taken the lead on moves to increase employment in the G8, and held a successful conference in February which agreed a set of policy principles to guide policy development in G8 countries.

4.13  The strategy set out in this paper will make a major contribution to the government economic agenda. But it also plays a central role in the reform of the Welfare State. The Government has embarked upon a far-reaching programme of welfare reform to create a welfare state that meets the challenges of the 21st century. The Green Paper 'A New Contract for Welfare', published in March, set out the principles that will guide reform.

4.14  In October 1998 the Secretary of State for Social Security set out the next phase of reform:

• a new, single work-focused gateway onto benefit (see paragraph 4.36-37); and
• reforms to benefits for people who are long-term sick and disabled.

4.15  These reforms are guided by a clear principle - work for those who can, security for those who cannot. The measures include:

• changes to Incapacity Benefit to strengthen the link between entitlement and work and to achieve a fairer partnership between state and private provision;
• reforming the All-Work Test for Incapacity Benefit to provide information on capacity for work, to inform back to work advice where that is requested and appropriate;
• a new Disability Income Guarantee for severely disabled people;
• extending Disability Living Allowance to 3 and 4 year olds with mobility needs;
• reforming Severe Disablement Allowance, with a more generous benefit paid to those disabled before the age of 20.

4.16  The Government will be announcing further welfare reforms, in particular in the Pensions Green Paper later this year.

WELFARE TO WORK

4.17  As a major part of the strategy to ensure employment opportunities for all, the Government is targeting groups of people who are at risk of becoming detached from the labour market. Long periods of dependence on benefits are deeply damaging for individuals and, as box 4.1 demonstrates, a major cause of poverty and social exclusion. They are also costly in economic terms - as people spend long periods out of work, their chance of moving into work declines significantly. They cease to be effective in their search for work - to all intents and purposes leaving the labour market altogether. If more people can be helped back into the labour market, we can increase the numbers who are in a position to compete for the job opportunities that exist. That means that the economy can grow more rapidly without running into skill shortages and wage inflation. In other words, the welfare to work programme can help raise the sustainable level of employment.

4.18  Most of the elements of the welfare to work programme are now in place. Throughout 1998, the New Deal for 18-24 years olds, for long-term unemployed people aged over 25, and for lone parents, have been rolled out on a national basis. The last Budget announced that a further £60 million of windfall tax receipts would be spent on the New Deal for partners of the unemployed. The New Deal for disabled people has already started on a pilot basis, which will inform the further development of the initiative beyond April 2000. Already the New Deal is delivering results. Box 4.2 sets out some of the examples of the thousands of individuals who have secured work through the New Deal.

The New Deal for 18-24 year olds

4.19  The New Deal for 18-24 year olds has now been running on a nationwide basis for 6 months. Its objective is to help young unemployed people to secure jobs as the most effective way of enhancing their earnings, increasing their skills and securing their future economic independence.

4.20  Over 160,000 young people have joined the New Deal, initially entering a gateway where they receive intensive support from a personal adviser. Young people have said that they find this an especially valuable element of the programme. During the gateway, particular help is targeted on people with problems such as homelessness, or alcohol or substance abuse. For example, in Brighton a mediation programme for homeless people has been founded to help New Dealers find accommodation.

4.21  So far 60,000 have completed the gateway phase. And already over 30,000 have started work, a figure which we expect to rise significantly in the months ahead, as more young people move through the gateway and into work. Over 21,000 of the jobs secured so far are unsubsidised.

4.22  To help maximise the numbers finding work, the Government is working closely with employers to address any barriers they face in recruiting through the New Deal. For example, the hospitality and construction industries are working closely with the Government to develop new ways in which the New Deal can help to address their skills shortage problems.

4.23  The Government is committed to ensuring the continuous improvement of every element of the New Deal. The New Deal Advisory Task Force, led by Sir Peter Davis of the Prudential, plays a crucial role here. The Task Force continues to assist the Government in developing challenging performance measures, and strategies to improve the effectiveness of local delivery.

4.24  An effective balance between rights and responsibilities is an important element of the New Deal for 18-24 year olds. The vast majority of young people have engaged enthusiastically with the New Deal and are taking full advantage of the new opportunities it offers. Given the substantial public investment involved, and the wide ranging opportunities provided by employers and by the voluntary and environmental sector, all young people should meet their side of the deal.

New Deal for the long-term unemployed

4.25  Since June 1998 those unemployed for over two years have been eligible for a £75 per week subsidy to help them into work. The last Budget announced the extension of this New Deal through a series of innovative pilots which will start at the end of this month. These are based on the intensive approach pioneered for 18-24 year olds. Those unemployed over 18 months, or over 12 months in some areas, will start an intensive gateway. Those who do not find work will enter a period of full-time activity for three months. The choice of options depends on individual need but can include work trials with employers, training, work experience, and support for self employment. On-going support will be available to those most at risk of remaining unemployed.

4.26  Since the Budget, and following a competition between different areas, 28 local partnerships have been selected to deliver the pilots, with the private sector leading delivery in 10 areas. Partnerships have been given flexibility to develop innovative ideas. For example:

in Cornwall, the GROW group will run a project specifically for the over 50s, to help people leaving declining industries to adapt their existing skills to new work. GROW has previously assisted land workers in making the transfer to woodland management and timber processing.

• in Hackney, the Reed Group is providing a transition grant to help people meet the up-front costs associated with a new job.

4.27  60,000 people are expected to enter the pilots in Great Britain. In Northern Ireland, as part of the Chancellor's economic regeneration initiative (see box 3.2), these opportunities will be open to all those who have been unemployed for over 18 months - some 30,000 people.

4.28  The pilots will be extensively evaluated, to yield evidence about what works and what does not. This evidence will inform the future development of the Welfare to Work programme. In two pilot areas (Ealing, Hounslow and Richmond; and Bexley and Greenwich) the programme will be delivered and evaluated using random assignment techniques. Under random assignment the piloted programme is made available to some people within the area, the 'pilot group', and not available to others, the 'control group'. The assignment of individuals between the two groups is decided randomly. Comparison between the experience of the pilot and control groups provides strong evidence of the effectiveness of different approaches.

The New Deal for lone parents

4.29  The New Deal for lone parents was tested in eight pilot areas from July 1997. Many lone parents would like help to get into work and 87 per cent of those attending initial interviews have agreed to participate in the New Deal. Of the 17,700 lone parents who chose to participate, more than a quarter have already successfully moved into employment.

4.30  An independent evaluation of the pilot areas concluded that the New Deal for lone parents is already having a real and marked effect on the rate at which lone parents move off Income Support. The results of the pilots compare favourably with programmes in other countries which have been running for much longer. Evaluation evidence shows that those lone parents who have moved into work through the New Deal are on average £39 per week better off. After the introduction of the Working Families Tax Credit, this figure will increase further.

4.31  The New Deal for lone parents was launched nationwide on 26 October. All lone parents on Income Support with children of school age are now being invited to participate and parents of younger children can also volunteer to join. Lone parents will be offered a personalised service which combines job search help, advice on in work benefits and childcare, and training, where appropriate. This is the first serious national attempt to help lone parents improve their prospects and living standards by taking up and increasing paid work.

The New Deal for disabled people

4.32  In the past, the benefit system has defined people with disabilities by what they cannot do, condemning them to a life of benefit dependency and low expectations. Already, the New Deal for disabled people is offering people with disabilities the opportunity to work and achieve their full potential. Pilots of a Personal Adviser service for disabled people who want to find work started in September 1998. A further six pilots start in Spring 1999, with private, voluntary and public sector agencies invited to bid to provide innovative and individually-tailored services. The single work-focused gateway pilots and the reforms to the All-Work Test announced by the Secretary of State for Social Security and the new, more generous Disabled Person's Tax Credit will play a key role in enhancing the difference this New Deal will make.

The New Deal for partners of the unemployed

4.33  Partners of the unemployed, mainly women, are themselves disproportionately likely to be unemployed. In the past, the benefit system has assumed that partners of unemployed people cannot or do not want to work, denying them help and opportunities. The last Budget announced that £60 million would be made available from the Windfall Tax to ensure that partners over 25 have the option to receive the help they need to get back to work. Childless partners, aged 18-24, will become eligible for the full range of services under the New Deal for 18 to 24 year olds.

Further development of Welfare to Work

4.34  The New Deal is targeted mainly on those who have been out of the labour market for some time. But the Government is also developing new approaches to improve the service available to people when they lose their jobs, or make an initial claim for benefits.

4.35  To help people who lose their jobs through major redundancies, Rapid Response Units have been established, coordinated by the Employment Service and bringing together a wide variety of local agencies. The units provide tailor made services including access to vacancies, individual counselling from a named contact, and early access to Employment Service programmes including training. They can be active within hours of redundancies being announced. For example, following the announcement of redundancies at Fujitsu in Durham, and Vickers in Leeds, local task forces were set up to coordinate assistance, guiding people to the help they need to move rapidly into new jobs.

4.36  The Government will also introduce a single work-focused gateway onto the benefits system for people of working age. This will bring together the Employment Service, Benefits Agency and other services in a more coherent and seamless service, and provide a personal adviser to help claimants become more independent. There will be a fundamental shift away from asking simply 'what money can we pay you?' to asking 'how can we help you become more independent'. This will complement changes to the All-Work Test introduced by the Secretary of State for Social Security, and reforms to make work pay. The Government will pilot the single gateway in four areas, from June 1999, and in a further eight areas, making use of call centre technology and the innovations and efficiency of the private and voluntary sectors, from November 1999.

4.37  The Government does not want anyone to miss out on opportunities to discuss the help that is available to them. So, from April 2000, subject to legislation as announced by the Secretary of State for Social Security, it will make it a condition of receiving benefit that, when asked to do so, people take part in an interview about their prospects of finding work. For some, such as the recently bereaved, single parents with very young children, people with heavy caring responsibilities or those suffering from acute illnesses, an immediate interview about work would not be appropriate. For them the priority will be to pay benefits. There is no question of forcing lone parents and disabled people into work, but too many people are labelled as unemployable when in fact they not only want to work, but also have a good chance of finding a job. The earlier support is given, the more likely people are to focus on the sort of work they could do in the future, and the less likely they are to become resigned to a lifetime on benefit. The Government believes that the principle of giving everyone a real chance to get back into work is right, and that the requirement to attend an interview is reasonable.

Funding Welfare to Work

4.38  The Welfare to Work programme is funded from the receipts from the one-off Windfall Tax on the excess profits of the privatised utilities. The Windfall Tax is expected to raise
£5.2 billion, with the second and final installment of £2.6 billion due in December 1998. Table 4.1 sets out the latest estimates of the allocation of the Windfall Tax receipts between programmes. The main change since the March 1998 Budget is the additional resources for the New Deal for those aged over 25 in Northern Ireland, and an additional £10 million for measures to help disabled people into work. The table also provides a revised profile of spending over the Parliament.

Table 4.2: The current NICs system

4.53  To tackle this, the Government has announced that from April 1999 the two per cent entry fee will be abolished so that employees will pay no NICs at all on their first £64 (at 1998-99 levels) of earnings. The present situation in which someone can be faced with a drop in net pay as a result of an extra penny of earnings will no longer arise. The removal of the entry fee cuts National Insurance for every employee in the country. From next April, twenty million employees will benefit by paying at least £66 a year less.

4.54  As chart 4.2 shows, there will also be a major simplification of employers' NICs, as a result of which the cost of hiring someone on half average earnings will fall by £250 per year. Currently employers also face a steep entry fee of £1.92 in respect of employees who earn over £64 a week. This distorts the labour market and discourages employers from taking on more low paid employees. Once in the system, employers also face four different NICs rates for their employees - distorting pay decisions. For example, an employer would pay NICs of £14.70 (7 per cent) on earnings of £209.99. But once earnings reach £210 per week the employer pays NICs at 10 per cent on all earnings, an increase of £6.30 per week on an extra penny of earnings. The reforms to be introduced from April 1999 make the NICs system simpler, fairer and more employment-friendly, without increasing the amount of NICs employers as a whole will pay.

Chart 4.2

The National Minimum Wage

4.55  The National Minimum Wage will help underpin the Government's welfare reforms. Together with tax and benefit reforms, the minimum wage will help to promote work incentives. It will ensure greater fairness at work and remove the worst exploitation.

4.56  From April 1999 the following rates will apply:

• £3.60 for adult workers aged 22 and over;
• £3.20 for trainees - workers aged 22 and over and in the first six months of employment and receiving training leading to a recognised qualification;
• £3.00 for workers aged 18-21 inclusive, rising to £3.20 in June 2000.

4.57  Some 1.9 million workers will benefit from the minimum wage. These include 1.3 million women, over 1.2 million part-time workers, some 200,000 young people, around 110,000 home workers and approximately 175,000 lone parents who work. About 13 per cent of young workers will benefit, as will 7 per cent of workers aged over 22.

4.58  The Government published the draft Regulations on 11 September. These set out the detailed implementation plans for the National Minimum Wage, including how the minimum wage is to be calculated, the pay reference periods, what employers need to do to comply with the legislation and the regime for enforcing it. The consultation period ends on 6 November.

4.59  Chart 4.3 shows that taken together, the National Minimum Wage and Working Families Tax Credit will significantly boost the effective hourly pay rates of people on low incomes, making it substantially more worthwhile to take a job. Box 4.4 illustrates this for a fictional low paid family. Below are some examples of effective hourly wage rates, excluding Housing Benefit and Council Tax Benefit, but including the WFTC and Child Benefit:

• a lone parent, with one child under 11, working 35 hours at the NMW of £3.60 will, with the WFTC, have an effective hourly wage rate of £5.50;
• a one earner couple, with two children, one under 11 and one aged 11-15, working 35 hours at the NMW will, with the WFTC, have an effective hourly wage rate of £6.37;
• a lone parent aged 21 working 35 hours a week at the NMW of £3.00 an hour, will, with the WFTC, have an effective hourly wage rate of £5.31.

Chart 4.3

4.60  These measures also significantly alleviate the worst aspects of the poverty trap. Along with the other measures announced in the March 1998 Budget, they will significantly cut the numbers of families facing high marginal deduction rates. Table 4.3 shows that instead of ¾ million families losing 70 per cent of any extra income they earn there will only be ¼ million.

Table 4.3: Tackling the Poverty Trap: Effect of the March 1998 Budget on combined marginal tax and benefit withdrawal rates¹

Tax and Benefits reform: future agenda

4.61  The Government is committed to further tax and benefit reforms to reinforce the measures already in place. It will introduce a 10 pence starting rate of income tax when it is economically right to do so and, as set out in the March 1998 Budget, it plans to raise the threshold for employee National Insurance Contributions to align it with the personal allowance for income tax.

4.62  In particular it is concerned to improve work incentives in two ways:

• by further boosting take-home pay in low-paid jobs, making it more worthwhile to work and;
• by further reducing marginal tax rates for the very lowest paid workers.

4.63  The Government wishes to design the new 10p rate in the way that best meets its objectives of improving work incentives and promoting a fair and efficient tax system. Introducing the 10p rate as well as the WFTC will ensure that it is low-paid families with children in particular that will receive a boost to their take-home pay.

4.64  As announced in the Budget, the Government is committed to protecting employees' rights to benefits when the threshold for employee National Insurance Contributions is raised. It is considering how this can most effectively be achieved.

4.65  The Government is looking at the scope for reform of National Insurance Contributions for the self employed. Without change, the self employed will face higher contributions than employees if their incomes are low, but substantially lower contributions if they have high incomes. Martin Taylor recommended a restructuring similar to that already being introduced for employers. The Government is considering his recommendations carefully.

IMPROVING SKILLS IN THE LABOUR FORCE

4.66  Improving skills is an essential element of building a modern labour market that gets the best out of all its people. As set out in Chapter 3, skills and education are central to the Government's productivity agenda. The last Budget set out a package of measures worth over £100 million to improve investment in skills, and to address emerging skill shortages - particularly in the IT sector. The New Deal, described above, has a significant emphasis on training and will contribute towards the improvement of employment related skills in the labour force. The last Pre-Budget Report announced the introduction of a New Deal upfront skills shortage subsidy to help employers facing high upfront training costs to meet skills shortages. The Government will now introduce these arrangements on a national basis, following the completion of the pilot phase this month.

MAKING A REALITY OF A FAMILY-FRIENDLY LABOUR MARKET

4.67  The Government places a high priority on policies designed to enable parents and people with caring responsibilities to balance family and working life. The Government has already started delivering on this agenda. It has introduced new rights to combat excessive working hours and new rights to parental leave. The Part-time Work directive will remove discrimination against part-time workers and increase access to part-time work. The Working Families Tax Credit will deliver improved help to parents with the costs of childcare via the childcare tax credit and £300 million is being invested in out-of-school childcare provision as part of the National Childcare Strategy.

4.68  People with family and caring responsibilities form a significant and increasing proportion of the UK labour force. Around 55 per cent of women with children under five are now in paid work. Approximately two-thirds of working mothers now return to paid work within 11 months of having a baby. Fathers have the highest employment rate of any group - 85 per cent - and the longest hours. Around two-thirds of people of working age caring for a sick, elderly or disabled relative are in employment and more would like to be.

4.69  Measures to improve opportunities of access to the labour market for parents and other carers who want to work, as well as increasing opportunities for the individuals concerned, can increase the effective labour supply and thereby increase sustainable employment levels and growth. As such, they have the capacity to play a powerful part in the Government's flexible labour market strategy.

4.70  The Government has already made considerable progress in breaking down some of the barriers to work faced by those with caring responsibilities. The New Deal for lone parents provides individualised advice to lone parents who wish to work. The National Childcare Strategy aims to ensure access to a range of high quality childcare in every neighbourhood and the Working Families Tax Credit includes increased help towards childcare costs. The forthcoming national strategy for carers will look at ways to help people combine caring responsibilities with paid work.

4.71  The Government has also indicated its commitment through new legislation in a number of areas:

• Working Time Regulations now in force (from 1 October 1998) provide new rights for workers ensuring that they do not have to work excessive hours and setting basic standards for paid leave;
• the Part-time Work directive will ensure that part-time workers are not treated less favourably than full-time colleagues;
• the Parental Leave directive will provide new rights to three months parental leave on the birth or adoption of a child and time off work for urgent family reasons. Employees will be protected against dismissal, or other action, if they exercise these rights.

4.72  The Government will ensure that this legislation promotes employability and flexibility, not high social costs, as we monitor its impact and evaluate its effectiveness.

4.73  The Government will also encourage employers and employees to look carefully at the costs and benefits of more widespread family friendly working practices. Many employers have already begun to see the benefits of operating family-friendly employment practices (see box 4.5). The Government will work in partnership with business and employees to take forward this agenda, drawing on the responses to its consultation paper, Fairness at Work.